Attrition Definition and Meaning

Attrition occurs when employees leave a company and their jobs are not filled. High attrition can be a warning sign to businesses that something is wrong with their culture, but it can also be a valuable tool to manage payroll without making drastic cuts through layoffs.

When companies adjust to shifting economic conditions, they often turn to payroll and staffing to quickly control costs. But sometimes, this plan to reduce payroll takes shape over time through a process known as attrition. Attrition is a voluntary way to downsize an employee pool.

Attrition differs from other methods of workforce reduction in a few ways, such as how those employees leave. It also describes a gradual decline in customers. This story will look at how companies use attrition to downsize and what it means for the bottom line.

Attrition Meaning

Attrition is a gradual and deliberate reduction in staff as employees retire or resign. Instead of filling those positions, the company chooses not to replace the departing team members. Sometimes organizations refer to the reductions as a “hiring freeze.”

Attrition is sometimes unpredictable and uncontrollable. But it is also a normal part of operating a business. 

Some economists see attrition as a positive way to reduce payroll because it is less drastic and disruptive than layoffs. Others view it as a net negative. Why? The eventual need to replace employees leads to higher costs with training new employees further down the road. Gallup estimates that the costs of replacing an employee are one-half to twice the employee’s annual salary.

The Importance of Understanding Attrition

Employee retention is key to any business’s success because it allows you to gauge employee satisfaction. A high attrition rate indicates that employees are leaving frequently. Lower rates show that employees are staying for longer. Most attrition falls under two categories: voluntary attrition and involuntary attrition.

Common reasons for voluntary attrition include:

• Personal reasons, like going back to school or structural changes within the company.
• Professional reasons, including dissatisfaction with their role or the company.
• Internal attrition, which happens when a team member moves within the company in search of a better fit.
• Demographic attrition, such as many employees in a similar demographic group (race, gender, age, etc.) leaving in large numbers.

Involuntary attrition happens when the employee leaves due to retirement, dismissal/termination or death.

Voluntary attrition may not immediately affect company morale. But it can have a negative impact if workloads increase for team members without a plan in place. In addition, the removal of some positions can limit promotional opportunities or movement within the company. Companies should observe morale and watch out for more attrition than initially intended.

How to Calculate Attrition Rate

The formula for calculating the attrition rate is simple. Divide the number of full-time employees who leave per month (separations) by the average number of employees at the company. Multiply that figure by 100:

Attrition rate = (Number of separations / Average number of employees) x 100

Attrition vs. Layoffs

Layoffs differ from attrition in that companies perform them as an active, immediate cost-cutting measure. Laying off staff members can lead to attrition, provided the company does not immediately hire as many employees as they cut.

Sometimes, a company may need to lay off employees not to cut costs but because of redundancies from a merger or acquisition. In this case, a company may trim departments or eliminate roles. These immediate needs usually require laying employees off versus counting on voluntary retirements or other forms of attrition.

Attrition vs. Turnover

Turnover differs from attrition because, in this case, the company replaces employees who leave their jobs. Employee turnover often happens within a year-long period. Companies lose talent for various reasons, including retirement, relocation and career switches.

Like attrition, however, turnover may be voluntary or involuntary. Voluntary turnover happens when employees choose to leave their jobs, while involuntary turnover occurs when a company terminates employment.

Understanding turnover is key to a healthy, balanced workforce. If many employees choose to leave a team or company within a short period, it could speak to poor management or disorganized processes. Management can use this knowledge to make substantial changes to policy or personnel.

Employee Attrition vs. Customer Attrition

Sometimes it is not the employees who leave a company but the customers. A few reasons customer attrition may occur include customers aging out of the target demographic or taking their business elsewhere.

The loss of customers through attrition is also known as churn rate. This happens for many reasons, including:

• Poor customer service
• Failure to update products or services
• Inability to onboard and promote services to repeat customers

Final Thoughts on Attrition

High attrition rates signify a company with culture or logistics issues. It can also be a significant indicator of burnout. Burned-out employees are 2.6 times more likely to leave a company. It can lead to damaging morale without measures in place to reduce the burden on remaining employees. Almost 42 percent of employees seeking a new job indicate that it is because a company is not adequately using them.

Common ways to mitigate attrition include:

• Conducting salary surveys to benchmark current rates
• Implementing manager training to teach leaders effective team management skills
• Offering flexibility in telecommuting
• Hiring the right people for the role
• Ensuring accuracy of job postings
• Focusing on internal promotions and growth

Successful companies keep a steady handle on attrition and can avoid drastic measures like layoffs. At the same time, they acknowledge the lasting impact high attrition can have on company culture.

Key Takeaways

• Attrition occurs when employees leave a company, and the company does not replace them.
• Companies can use attrition to gradually reduce payroll expenses.
• Attrition differs from turnover in that companies do not replace workers after they leave.
• Attrition differs from layoffs in that an organization does not terminate many employees at once.

(Reporting by NPD)